An evolving socio-economic environment is changing the dynamics of residential real estate development in Saudi Arabia, Neha Bhatia reports

Last week, it was revealed that Saudi Arabia plans to spend $32bn (SAR120bn) on subsidised home loans for borrowers, in order to expand the private sector’s role in a mortgage market that has traditionally been dominated by the government.

The kingdom’s new housing programme, announced on 5 February, 2018, also includes a $4.8bn (SAR18bn) loan-guarantee programme to boost access to funding, and $3.4bn (SAR12.5bn) to support home down-payments, to be spent in the period to 2030, Saudi Arabia’s Housing Minister, Majed Al-Hogail, told Bloomberg.

Saudi Arabia – through increased private-sector participation – is reportedly eyeing the expansion of its mortgage market by more than 70%, taking its value to $133.85bn (SAR502bn) by 2020. The government currently provides 65% of home loans in the country, but the housing minister said a revamp was underway, adding: “We want to change that completely. It is a very generous programme. It [will enable] the private sector, reducing [its] risk to a certain level.”

The latest financial package is one of many steps being taken by the kingdom in its efforts to meet its goal of raising home ownership by citizens.

Al-Hogail said that authorities were hoping to raise home ownership among Saudi citizens to 60% by 2020. In that light – and encouragingly – the latest funding programme appears to be part of a long-term strategy that the kingdom has been preparing for a while. For instance, Saudi Arabia’s sovereign wealth fund, chaired by the Crown Prince of Saudi Arabia, Mohammad Bin Salman, formed a company last October to help meet some of the objectives related to the country’s residential sector.

The Public Investment Fund (PIF) established Saudi Real Estate Refinance Company (SRC), which PIF said would work to improve the performance of the kingdom’s real estate sector, as well as its contribution to the country’s gross domestic product (GDP). SRC was launched in partnership with the Ministry of Housing and under the chairmanship of Al-Hogail.

Demand for property finance in the kingdom is expected to rise from $74.7bn (SAR280bn) in 2017 to $133.3bn (SAR500bn) in 2026. SRC is expected to refinance up to $20bn (SAR75bn) in the kingdom’s real estate sector during the next five years.

As part of its mandate, SRC “will act as an intermediary access point for investors”, Saudi’s state news agency, SPA, revealed at the time of the company’s launch.

Commenting on the kingdom’s latest $32bn package, Al-Hogail said that the government would “monitor conditions” and review its policies “to ensure there is no bubble” in the housing sector.

“When you launch a very strong programme like this, you expect [that] the price could increase,” the minister explained.

“You could expect more defaults, because you are lending to people who don’t have steady income.”

Knight Frank, in its Saudi Arabia Residential Market Review, released last week, stated that the residential market across Saudi’s main cities started decelerating in 2016, a slowdown that continued in 2017. It added: “In recent quarters, we have seen [...] residential real estate prices have flattened, which could be an indication that the market has bottomed out and may be close to stabilising following a year of rapid decline.”

Commenting on these findings, Raya Majdalani, research manager at Knight Frank, said the lack of affordability was among the factors that weakened the kingdom’s residential market: “The trend towards a weaker residential market is mainly due to eroding liquidity, and is exacerbated by a combination of more inherent factors, namely the lack of affordability and limited access to financing, supply shortage in the mid- to lower-end of the market, and the lack of suitability of existing stock.”

In spite of these challenges, Knight Frank said that it was “broadly positive” about the kingdom’s residential market, as a result of “government initiatives aimed at addressing key challenges restraining the residential sector”.

The report added: “Recent initiatives include the release of regulations for the introduction of a 2.5% white land tax on undeveloped land plots, the approval of regulations for the use and listing of real estate investment trusts (REITs), the introduction of a new mortgage law to boost Saudi Arabia’s home-ownership rate, the development of a home-building programme – named Sakani – by the Ministry of Housing, the launch of the Wafi online programme, and the creation of a real estate refinance company by PIF.”

Indeed, the Saudi government’s housing targets are clear – local authorities will develop 125,000 homes in 2018, compared to the 110,000 built last year, according to Al-Hogail. Most of these new units will cost between $66,700 and $200,000 (SAR250,000 and SAR750,000).

Saudi’s Ministry of Housing distributed almost 55,200 homes last year in Riyadh to facilitate home ownership. Meanwhile, in the Dammam Metropolitan Area (DMA), the ministry delivered 44,600 units last year, with additional handovers expected in 2018.

The Saudi Arabian government will not be the only developer to add to the kingdom’s residential market this year, however. The country’s residential property sector could see the addition of almost 40,000 units during the next two years, many of which are expected to be delivered by private-sector developers.

The residential market in Saudi Arabia is expected to witness the completion of 20,000 units in 2018 and 19,000 units 2019, according to property consultant JLL.

According to JLL’s A Year in Review report on the Saudi market, almost 19,500 homes – most of which were stand-alone units – were completed in Riyadh last year.

This movement brought the Saudi capital’s total residential stock to 1.2 million units. Projects completed in Q4 2017 included Phase 3 of Darraq in Riyadh’s Diplomatic Quarter, which saw the addition of 76 villas and 35 apartments, and 22 units of Sahab Villas, with its remaining six units expected to be completed in Q1 2018.

Developers of high-end residences are also expected to make a mark in the city’s property segment this year. The JLL report stated that Rafal Living’s 350 apartments, two Damac Towers buildings with a total of 440 apartments, and Malazak Tower’s 245 units were among the completions expected in 2018, with the Ramlah Tower project’s 249 apartments expected to be ready in 2019.

Meanwhile, property growth was limited, but steady in Jeddah, which posted 1,000 residential unit completions in Q4 2017. Overall residential supply in Jeddah increased by approximately 10,000 units, raising the city’s total stock to 813,000 units in 2017, even as “no notable completions” were recorded during the year. While residential sales and rental values reduced across the city, JLL noted signs of stabilisation in the market, “with the rate of decline slowing towards the end of the year”.

Optimistically for Jeddah, the development progress on projects such as the 242-unit J-One, the 140-unit Diyar Al Salam Residences, and the 85-unit Golden Tower could see “up to 1,100 quality units enter the market in Q1 2018”.

“A further potential 2,400 apartments, part of the first phase of Al Ra’idah, could be delivered in 2018 if the project is handed over as planned,” JLL’s report continued.

Al Ra’idah, according to the consultancy, will mark the largest delivery of community residences in Jeddah in a year, and this trend is likely to continue as master-planned communities are added to the city’s development pipeline, JLL added.

Apartment transactions in Riyadh rose by 12% in 2017, compared to 2016 figures, and prices recorded an annual drop of 4%, JLL’s report said. Similarly, apartment rents in Jeddah showed a 2.7% Q4 2017 dip “in areas synonymous with expatriates”, though rents remained relatively stable in the city during that period.

The performance of Saudi’s residential rental sector in 2017 was perhaps most succinctly reflected in the Q3 2017 financials of a diversified conglomerate in the country. Red Sea International Co revealed in a filing to Tadawul that a 23.2% decline in rental sales was partly responsible the reduction in its gross profit margin for Q3 2017.

The developer’s revenues decreased due to a 29.9% reduction in building sales, compared to corresponding quarterly figures for 2016. Overall, Red Sea International Co – which owns assets in Saudi Arabia such as fixed accommodation and hotels in Yanbu and Jubail – reported a net loss of $3.4m (SAR12.7m) in Q3 2017, a significant drop compared to its Q3 2016 net profit of $2.8m (SAR10.5m).

Some of these market movements can be attributed to the launch of value-added tax (VAT) and expat levies in Saudi Arabia, as well as their impact on the kingdom’s demography, and these factors could continue to influence the kingdom’s residential sector in 2018 as well.

For instance, Saudi Arabia, home to millions of expatriates, is noting the effects of repatriations on its property market, JLL found. Commenting on the impact in Jeddah, it added: “The tax levy on expatriates could be restricting demand for rentals, as expatriates repatriate family members to avoid [the payment].”

It is impossible to accurately foretell how these externalities may affect the kingdom’s residential property segment in 2018. However, Saudi’s steadfast investments in improving its housing stock will undoubtedly have a positive impact in the country this year.

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